Optimal Monetary Policy with Informational Frictions

Download or read book Optimal Monetary Policy with Informational Frictions written by George-Marios Angeletos and published by . This book was released on 2011 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study optimal monetary policy in an environment in which firms' pricing and production decisions are subject to informational frictions. Our framework accommodates multiple formalizations of these frictions, including dispersed private information, sticky information, and certain forms of inattention. An appropriate notion of constrained efficiency is analyzed alongside the Ramsey policy problem. Similar to the New-Keynesian paradigm, efficiency obtains with a subsidy that removes the monopoly distortion and a monetary policy that replicates flexible-price allocations. Nevertheless, "divine coincidence" breaks down and full price stability is no more optimal. Rather, the optimal policy is to "lean against the wind", that is, to target a negative correlation between the price level and real economic activity. Keywords: Business Cycles, Dispersed Information, Stick Information, Rational Inattention, Optimal Policy, Price Stability. JEL Classifications: E32, E52, D61, D83.